Secondary Navigation

The U.S. Trade War: Burning Bridges to Growth

Two weeks into May 2018, following a meeting between top economic officials from the United States and China, a temporary truce was struck. Beijing agreed to significantly cut the trade deficit by increasing its purchases of U.S.-made goods. Treasury Secretary Steven Mnuchin said that the United States and China were "putting the trade war on hold."

Less than a week later, a short White House statement was released that announced the imposition of a 25-percent tariff on Chinese exports. China's Commerce Ministry immediately published a statement accusing the United States of launching the first strike in a new war, and vowed to retaliate with equal "scale and intensity."

The war so far

Thus, an exacting tit-for-tat bout was launched on a global scale:

• China introduced its own set of tariffs on $50 billion worth of goods.
• The White House declared a 10-percent tariff on $200 billion worth of imports if China followed through with its retaliation.
• China retaliated with a 10-percent tariff on $60 billion worth of U.S. imports.
• The White House threatened an additional $267 billion worth of tariffs if China followed through with its second retaliation.

The total tariffs announced or proposed by China so far equal $110 billion - or most of its exports to the United States. The United States, on the other hand, is not quite finished. As Secretary of Commerce Wilbur Ross said, "Naturally they'll retaliate a little bit. But at the end of the day, we have many more bullets than they do. They know it."

Why fight?

The legal basis the Trump administration is using for the tariffs is national security. While it may seem that the tariffs are off-the-cuff reactions rather than measured responses, the legal foundation of the tariffs was well-studied beforehand.

The argument is that the United States's large trade deficit with China, as well as China's theft of intellectual property from the United States, could jeopardize the national security of the United States in the future.

Why not fight ...

The economic implications, however, may have been less thoroughly thought out. Former top economic advisor to Donald Trump and former president of Goldman Sachs Gary Cohn said that the tariffs could completely undermine the intended benefits of the Tax Cuts and Jobs Act. He also warned that it could cause price inflation, higher consumer debt and, in the end, a slowdown of the entire U.S. economy.

Christine Lagarde, director of the International Monetary Fund, warned that this fiscal policy could ultimately drag down the United States economy. She advised that the government should put an end to all tariffs, as they have a highly detrimental effect from a macroeconomic perspective.

A study from The Trade Partnership showed how it could even have a damaging impact on the very country it is supposed to help. It predicts a net loss of more than 400,000 U.S. jobs, as well as a 0.2-percent drop in annual U.S. GDP growth. In all, the U.S. tariffs placed on Chinese goods could lead to a one percentage point decrease in global GDP growth.

So perhaps China's Commerce Ministry said it better than anyone else: "In this day and age, launching a trade war is not in the interest of the world. We call on all countries to act together to firmly stop such an outdated and backward move, and to firmly safeguard the common interest of all mankind."